Singapore Airlines (SIA SP) - 3QFY17 A Good Quarter As SIA Benefits From Surge In Cargo Profits
- SIA’s 3QFY17 earnings were better than expected as cargo operations posted the highest quarterly profits in nine years. However, this should not be a cause for rerating, as cargo profits could still normalise unless supply conditions ease.
- Underscoring that, SIA warned that yields and loads for both pax and cargo operations are expected to remain under pressure.
- Meanwhile, SIA also indicated that it has entered into longer-dated fuel hedges at attractive levels.
- We will provide further updates post analyst briefing.
- Maintain HOLD. Target price: S$10.10.
Better-than-expected earnings on highest quarterly cargo profits in nine years.
- While headline net profit matched our estimates, 3QFY17’s results included S$79m in impairment charges, relating to the writedown of Tigerair brand and trademark. Excluding this and assuming no tax impact, net profit would have amounted to S$256m or 45% higher than our estimates.
- The key variance was:
- better-than-expected cargo profits of S$53m vs our estimate of S$19m,
- better-than-expected performance at Scoot and Tigerair, due to lower unit cost, and
- potentially higher bellyhold cargo at parent airline.
Broad-based decline in yields, but lower unit cost/hedging losses led to better profits.
- Decline in parent airline’s pax yields accelerated from 3.8% in 2QFY17 to 5.5% in 3QFY17.
- Regional full service carrier, SilkAir’s decline in yield also accelerated to 7.4% decline vs 6.8% in 2QFY17.
SIA goes for long-dated Brent hedges, hedging up to 2022.
- SIA changed its fuel hedging policy of hedging for up to 24 months and announced that they have entered into longer-dated Brent hedges till 2022.
- The airline has hedged between 33-39% of their fuel requirements at between US$53-59/bbl. The levels are attractive and do not represent any significant premium over spot prices but amount to substantial forward commitments.
- This could potentially lead to SIA becoming cautious towards dividend payout. We have assumed a 50% payout for FY17, excluding EI distribution from sale of HAESL.
Associate income reversed to the black to S$6m in profits, (vs 2QFY17: -S$17m).
- This implies narrowing qoq losses from 23%-owned Virgin Australia and 49%-owned Vistara.
- Operating cash flow declined 3.8% yoy in 9MFY17, while FCF was negative due to a doubling in net capex. Meanwhile, book value rose 6.8% yoy to S$11.70, due to higher profits and S$295m upward revision in fair value reserves.
Improvement in cargo profits might not be sustainable.
- In our preview note, we noted the possibility of a recovery in cargo operations led by robust North American demand. Still, actual profits surprised to the upside. However, this was attributed to a seasonal uplift and cargo profits could still normalise unless supply conditions ease.
- SIA noted that both pax and cargo yields are expected to remain under pressure.
We are neutral on the results.
- While cargo operations are likely to steal the limelight, fact remains that yields have deteriorated, indicating the competitive pressure might not have abated or at least the impact has yet to be seen.
- Meanwhile, SIA’s longer-dated hedges are an attempt at controlling costs in an environment of unstable yields. That on its own is not a catalyst for re-rating.
- No change to our earnings estimates, pending the analyst briefing.
- Maintain HOLD with a target price of S$10.10.
- We continue to value SIA at 0.7x FY17F book value ex-SIAEC, 1-SD below mean P/B.
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- Improving pax and cargo yields.